'Underwater' homes now a minority in Metro Orlando

For the first time in years, the majority of Metro Orlando's mortgaged houses are not "underwater."

Housing prices started collapsing about five years ago, and just two years ago, about 55 percent of Orlando-area homeowners owed more on their mortgages than their houses were worth. Unable to sell these financially submerged properties, many homeowners have been trapped in them.

But a third-quarter report by the real-estate-research company Zillow Inc. shows that the proportion of negative-equity homes in the four-county metropolitan area has now dwindled to fewer than 48 percent — still high but continuing to decline.

Experts predicted this week that fewer underwater homes would lead to fewer foreclosures and more houses hitting the market, which might soften the recent rise in existing-home prices.

"Most people focused on homeowners being trapped in homes and [how] they couldn't buy new homes — and that would suppress sales," said Stan Humphries, Zillow's chief economist. "They focused on the demand side, to the detriment of the supply side.

"… But the people who couldn't go out and buy also couldn't sell," he noted. "Those homes have been locked up, and that created inventory constraints, which has led to price spikes."

The shrinking pool of underwater homes is expected to have mixed effects on the local housing market:

•Fewer than half of all mortgaged homes are now worth less than their loan balance, but many of those owners are very troubled financially: About 19 percent of Metro Orlando's underwater homeowners have defaulted on their mortgage — triple the national rate. Defaults are most likely to occur when a house is worth no more than half its mortgage, and about a quarter of Orlando's mortgaged homes are that deep in the financial red zone.

•As more owners realize they can now pay off their mortgage if they sell, more listings will hit the market. An increase in homes for sale would typically undercut prices, but for much of this year Orlando's supply of resale properties has been half what is considered normal, and analysts say the market could easily absorb some increase in inventory.

•Lenders have not been eager to refinance homes, but they are more likely to restructure the debt on houses with some owner equity. With interest rates still near historic lows, homeowners who are no longer underwater have a better chance of refinancing and lowering their monthly mortgage payments — and the added disposable income could help revive the local economy.

"Lost housing wealth has crippled the recovery in a way," said Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness. "Consumers have been dealing with this balance-sheet damage since the low point of the crisis. … Seeing your nest egg dwindle away affects how people spend and save."

Not surprisingly, younger homeowners are more likely to still be underwater: About 64 percent of mortgage holders younger than 40 have negative equity in their homes, compared with 43 percent of those age 40 or older.

The shift in Orlando's home-equity status from majority underwater to minority underwater has been quite recent, with the rate of negative-equity homeownership dropping from 54 percent in the first quarter and 52 percent in the second to 47.7 percent in the third quarter — "pretty decent progress," Zillow's Humphries said.

Rising prices are the main reason a majority of Metro Orlando's mortgaged homes are now floating on their sea of debt. Zillow says existing-home-sales prices have risen 3 percent during the most recent four quarters in the metro area (Orange, Seminole, Osceola and Lake counties). The Orlando Regional Realtor Association reports a 9 percent increase during that time frame for resales in the core Orlando market (mainly Orange and Seminole counties). But Stan Smith, a UCF finance professor, just released a report showing slight, yearlong declines in home prices for Metro Orlando, Florida and the U.S.

Smith said that, with the home-price appreciation experienced in the Orlando area in recent months, it was inevitable that more mortgages would shed their underwater status. Still, Orlando and Florida have a long way to go: The U.S. rate of underwater mortgages in the third quarter was just 28 percent, Zillow noted.

For UCF's Snaith, the number of underwater homes in the Orlando area is still formidable, but the recent shift could help lift the economy.

"I think the direction of the change carries with it some upward boost of confidence," he said. "Little things like that start to snowball, and suddenly you see more of a recovery."